In a case of first impression, the U.S. Court of Appeals for the Ninth Circuit found that pharmaceutical sales representatives cannot recover overtime pay under the Fair Labor Standards Act (FLSA) because they fall within the FLSA’s outside sales exemption. Christopher v. SmithKline Beecham Corp. d/b/a GlaxoSmithKline, 9th Cir., No. 10-15257, 2/14/11.

The plaintiffs, employed by Glaxo as Pharmaceutical Sales Representatives (PSRs), filed suit claiming they were owed overtime wages, under the FLSA, for the 10 to 20 hours in excess of 40 hours per week they often worked. The parties cross-moved for summary judgment, and the plaintiffs moved to certify a conditional class. The U.S. District Court for the District of Arizona granted Glaxo’s motion for summary judgment, finding that PSRs “unmistakably fit within the terms and spirit of the [outside sales exemption].” The plaintiffs appealed.

Affirming the district court’s decision, the Ninth Circuit analyzed the Department of Labor’s (DOL) regulations at 29 C.F.R. § 541.500(a) which define an “outside salesman” as an employee “whose primary duty is … making sales within the meaning of section 3(k) of the [FLSA] … and … who is primarily and regularly engaged away from the employer’s place or places of business in performing such primary duty.” Section 3(k) of the FLSA defines “sale” or “sell” to include “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.”

The Ninth Circuit noted that the pharmaceuticals industry is heavily regulated and federal law prohibits pharmaceutical manufacturers from directly selling prescription medications to patients. Moreover, the “purchasers” are not the patients themselves but rather the prescribing physicians. Thus, a “sale” occurs at the exchange of a non-binding commitment between the PSR and the physician at the end of a successful call. The court found the fact that the commitments were non-binding was irrelevant because a physician’s commitment to a PSR, binding or not, is a meaningful exchange since pharmaceutical manufacturers value these commitments enough to reward a PSR with increased commissions when a physician increases his or her use of a drug in the PSR’s bag. The court found that “for all practical purposes, this is a sale.”

In so ruling, the circuit court relied on Jewel Tea Co. v. Williams, 118 F.2d 202 (10th Cir. 1941), which found that door-to-door salesmen fell under the outside sales exemption. The court noted that the PSRs are similar to the door-to-door salesmen in Jewel Tea Co. because they “worked in assigned territories; did not make immediate deliveries; were required to analyze client backgrounds; received product training; employed a pre-planned routine for client interaction; were accompanied by supervisors for training; were later subject to minimal supervisors oversight; completed clerical activities at the end of the day; and had a dual salary and commission-based compensation plan tied to their performance.”

The court declined to give deference to an amicus brief filed by the Secretary of the Department of Labor in In re Novartis Wage & Hour Litig., 611 F.3d 141 (2d Cir. 2010). In this amicus brief, the Secretary argued that PSRs do not meet the primary duty test for the outside sales exemption because “when an employee promotes to a physician a pharmaceutical that may thereafter be purchased by a patient from a pharmacy…the employee does not in any sense make the sale.” The Ninth Circuit disagreed and found that the DOL’s regulations “direct employers, employees, and this court back to the language of the FLSA rather than “setting forth a particular test for ‘sale’ or instructing employers to look for indicia of sales.”

The court found the DOL’s “parroting” of the statutory language in section 3(k) of the FLSA troubling, and thus, declined to give “controlling” deference to the Secretary’s interpretations of section 3(k). The Ninth Circuit noted the DOL’s acquiescence in the sales practices of the drug industry for over 70 years in the classification of pharmaceutical sales representatives as exempt. Thus, the court took a dim view of the DOL’s last-minute weighing in via an ad hoc amicus brief in Novartis and suggested that giving any deference to the DOL’s position would essentially sanction bypassing of the Administrative Procedures Act and notice-and comment rulemaking.

In finding that PSRs fall within the outside sales exemption, the Ninth Circuit creates a circuit split with the Second Circuit, which held In re Novartis Wage & Hour Litigation, that PSRs did not meet the requirements of the outside sales exemption. The Ninth Circuit’s decision is a significant one for the pharmaceutical industry because as the court indicates, “there is homogeneity within the industry—PSRs carry out essentially the same business functions regardless of which drug manufacturers they represent.” The court stressed that the PSRs in this case went as far as they possibly could under the law toward making a sale. It remains to be seen whether the court’s decision will also apply with respect to promotional employees who are assigned territories, paid based on sales in their region, but do not actually make their own sales, even though they legally could.